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  • The Energy Zeitgeist
Articles:

The Energy Zeitgeist

17 July 2019

PANEL DISCUSSION INSIGHTS

In the last ten years the renewable energy market has experienced gigantic change. This was the theme of the recent panel discussion held at BDO's Global Annual Natural Resources Conference in London in June 2019. With renewable energy replacing traditional energy sources of coal, oil and gas at an increasing rate, it is disrupting markets and governments on a scale equivalent of previous global revolutions, albeit driven by the ecological and environmental imperative to manage climate change. 

Richard Russell, RES, Abid Kazim, Next Energy Capital, Chris Newton, DNV GL and Gordon Johnston, Allianz Capital Partners joined Marc Reinecke from BDO to discuss the challenges and opportunities related to a global shift to a less carbon –intensive energy supply. 


GLOBAL OUTLOOK TO 2050

Chris Newton, Director, Renewables Advisory at DNV GL provided the global and regional forecast for the energy mix looking out to 2050. With 13,000 data points collected over two years, DNV GL's Energy Transition Outlook, models the energy mix out to 2050. Considered conservative, although adapted regularly, the model does not account for ‘unknown’ future innovation.

As of today, the model forecasts that primary energy will peak in 2032. Newton says that energy efficiency that will play the major part in the energy transition, even as global GDP rises. Electricity requirements will double but the way we  connect, use and consume electricity is fundamentally changing. He continues to state that oil will be flat and that gas will have a role, but will not grow past 2030. Gordon Johnson, Director, Asset management, Renewables from Allianz believes that the “gas transition will be very short, driven by a collapse in the renewablesprice”.

The forecast for fossil energy use will decrease past 2020 with solar PV/wind supply replacing it. The growth of solar has been the most dramatic with wind second. Even if capacity of fossil fuels remains the same, its use will be to manage peak demand rather than bulk generation, which is a massive shift. Abid Kazim of Next Energy Capital who runs the largest solar farm in the UK believes the world is about to change and that many of the companies running today, will not be running in the same way in the future. 

 

 

SUBSIDES

It was the case for a long time that renewables were only economical with subsidies. This has changed fundamentally in the past 10 years with the plunge in solar/wind costs. Subsidies have their place at times, but can also distort markets. It is relevant to note that fossil fuels are also subsidised which the IEA’s World Energy Outlook tracks.  

Renewables are approaching ‘grid parity’ in many parts of the world. This is where the cost of renewables is equal or less than fossil fuels. Some parts are still reliant on auctions and subsidies, but that is quickly changing. For Richard Russell, group commercial director at RES, a pure play renewables developer says that they have had to adapt their business model to the fact that they no longer have subsidies for their projects. Subsidies provided the boost the industry needed to get the market going and new investment has arrived. It also provided investors certainty on the price risk.

“Our challenge is with cost reduction and generating value/return on investment”, says Russell.

Unsubsidised wind and solar PV come with two main challenges. The first is volume risk: the inherent variability of wind and solar irradiance, and the other is price (or merchant power price) risk. New approaches are being developed to mitigate both volume and price risk, for example weather derivatives and associated insurance products, corporate power purchase agreements (known as corporate PPAs - where corporates seek to fix their power prices over the long term) and power price hedges provided by banks. 

With long life cycles of the projects and downward price pressure, investors and developers are looking at transparency and security around price. Abid Kazim of Next Energy Capital who runs the largest solar fund in the UK remarks, “Subsidies are dead”. 

Johnson follows with “You don’t need subsidies for projects in Southern Europe anymore; you don’t need subsidies for onshore wind projects in Northern Europe anymore; and you don’t need subsidies in the US or Australia”. 

This rapid reduction in the price of renewables has shifted the economics of renewable uptake, but subsequently put  assets in traditional energy at risk. 

 

RISKS TO MAJORS

“It is going to hit soon” declares Kazim who explains that worldwide, many of the majors assets are at risk of being ‘stranded’. Globally, the majors, banks and investors are all exposed and experts are warning of a ‘carbon bubble’. 

It has been happening all over the US with many countries now shutting down their coal plants – the latest being in Korea, the fourth biggest coal importer which is looking to shut down 20 coal-fired plants.  Australia has a huge stranded asset fleet of coal plants about to go off-line in the next five-years – all old and expensive.  It is questionable why governments like Australia, who are still investing in coal power plants, continue to do so.
Many of their export markets are increasingly transitioning to renewables, thereby risking investing in what will become a stranded asset. 

Kazim notes “The new build costs of wind and solar are now undermining marginal costs of these plants, which then means the asset base of coal companies, are becoming worthless. Gas is coming up to fill that gap, with wind and solar also coming in”. 

Some of the majors are now moving into renewables, determined to diversify to avoid a ‘Kodak Moment’, however the short-termism of corporate policy and CEOs switching every 18 months makes investing in long-term power solutions challenging. 

But, the elephant in the room, and what very few people are talking about is what does this mean for asset impairment and what does it mean when you are writing off your only business? Residual values in the traditional sector will be the most susceptible to loss of value. 

 

THE GRID DILEMMA

Any advancements in renewables is dependent on how we can distribute that energy. Access to the grid is imperative for any renewable project looking to supply the market. However, as it stands, most grids of today are unable to meet the needs of the number of energy projects looking to connect. Huge shifts in CAPEX with the continued growth of non-fossil generation will require our grids to be re-worked. The way we consume and use energy is changing. According to Johnston, “the utility structure of the world is changing. Tomorrow’s utility will be completely digitised.”

The major dilemma for grids right now is that consumers are dropping off. Consumers are able to install solar and batteries cheaper than they can buy off the grid. Telephone companies saw a similar disruption with the introduction of the mobile phone and the demise of the landline. Grids will have to re-invent themselves, similar to the telcos, to find new ways to service consumers. A model might emerge where you do not buy electricity from the grid, but purchase access to it.

The constraints of the grid are also a problem for the investors. In Australia, the grid turns off when it cannot take on any more energy. This limits renewables projects from sending their ‘product’ to market.

 

SOME OF THE TECH IS NOT QUITE THERE YET... BUT, IT'S COMING

Twenty years ago a single onshore wind turbine used to generate 750KW, we are now looking at 12 MW (see GE's Haliade-X). Solar in 2009-10 was a venture capital industry, but today the cost of solar has dropped 30% in one year alone. Innovation in technology, similar to the innovations of the ‘microchip’ are seeing new generations of renewable technology driving cost and capacity efficiencies to new heights. 

New business models are developing off the back of digital transformation in the energy sector, however some of the tech is not quite there. There is the potential for ‘energy clouds’, digitisation and using gas pipelines and storage tanks as a means to transport renewable energy. Electric vehicles acting as mobile battery storage units by using cars as batteries to transport energy to reduce the CAPEX on grid infrastructure is one of the more outlandish possibilities. 

The technology surrounding EVs is also gaining momentum. Kazim commented, “Every car major on the planet is investing in EVs, and it will be solid state batteries that will change the game forever”.  Johnston says that in all likelihood we are looking at 2024-2025 for that technology to come online. McKinsey predict that price parity of EVs/Fuel cars will be reached in the early 2020s. 

Today, more corporates are investing in batteries. Tesla and other big corporates are signalling that they may even enter the mining industry to help secure the raw materials. Kazim noted that the “person that can crack the solar plus battery project will revolutionise energy consumption and production. It’s coming, and coming quickly”. The Tesla 100MW battery in Australia, which according to BDO’s recent discussion with Jay Weatherill has outperformed all expectations.   Johnston says that the dramatic drop in solar from US$400MW/hour to US$40 MW/hr in nine years “will happen in batteries. It’s just a matter of time”. 

On the demand side, Russell comments, “the next 20-30 years will change considerably given the rise of the ‘Internet of Things’ and the ability to predict demand”. As an example, with the connectivity of appliances, there will be the ability to optimise their usage of electricity through a network at a particular point in time. The ability to optimise and manage our usage is important. With the huge proliferation of solar, huge peaks will occur at
particular times producing excess supply of energy by the producers, demand side management of energy will see rapid improvements, with solutions creating energy efficiencies worldwide. Russell says, “Watch for the unicorns that will create the disruption”.  

 

INVESTMENT IN RENEWABLES

There is wall of money falling into renewables now and it is happening almost everywhere. Kazim noted, “Vietnam is really exciting at the moment and is currently a net exporter of energy to Cambodia and Laos”.  Everywhere on the planet is investable now and everywhere on the planet is investing in electrification. Europe Japan, China and America are those investing. Massive amounts of money are being washed around which is creating some peculiar behaviour, some of which is unsustainable. 

The investment opportunities globally are immense. Take India as an example, for India to consume as developed countries they would need installed capacity of 1.4 terabytes. Currently they have 400GW (376 GW + 200 GW (solar/wind)) – so are therefore only at one quarter of where they need to be, or one fifth to consume like the Americans, which is around 2 to 3 TW. This provides a huge opportunity to supply and electrify India as it continues to develop as one of the world’s fastest growing economies. Their journey has begun with over a million ‘Tuk Tuks’ electrified. 

Russell notes, “Developers are looking for sites that maximise time and location value of where power is required. We need to think about investors looking for optimised projects on load usage. We see real opportunities around digitalisation”. Kazim says “You need to focus on your operations. Costs are going down, returns are going down, and a huge amount of cash is hitting the market” making investing a delicate act. 

 

SO WHERE TO NEXT?

Russell concludes, “for renewables to really work, we need to re-think and re-work the approach to the transmission and distribution of electricity and how that network supports the infrastructure of renewables’. 

Marc Reinecke, Leader, Global Renewables, BDO concluded "It’s clear that there are some strong views in the market about the speed of penetration of renewable technology and its impact on the conventional energy business. It is difficult to unbundle these sentiments and translate them into meaningful expectations about the future but what is clear is that renewables have seen phenomenal growth over the past decade, outpacing most previous forecasts, and this is only expected to increase”. 

Many agreed the decision to move forward has nothing to do with technology, but ‘people’. Aligning the consumer, producer, investor and regulator is the challenge at hand.